How could franchisees tax real-estate signs bought complete, rented to brokers, and changed only by simple rider swaps?

Plain-English summary

A redacted manufacturer's president said the company was becoming a California franchisor. It would sell complete real-estate-sign packages—frames, signs and stakes—to franchisees, which would rent, place and remove them for local real-estate offices.

The franchisor intended to charge “sales tax” on every sign. An absent brochure reportedly showed only models R-8 and R-9 with rider attachments; their price included a choice of 20 riders. The requester said occasional swaps would not affect sign value and that no signs could otherwise be modified. Counsel assumed rider changes required very little effort.

Sections 6006/6010 and regulation 1660 required same form plus sales-tax reimbursement or timely first-rental-period purchase-price use tax to avoid rent tax. Otherwise lessees owed use tax on rent and lessors collected/paid it.

Annotation 330.3900 used substantial value excess as a changed-form indicator, while 330.3920 et seq. treated little/no lessor fabrication as same form. Under the very-little-effort assumption, rider swaps did not prevent same-form treatment. The source does not independently substantiate the requester's no-value-effect statement.

That conclusion gave franchisees two paths. They could pay reimbursement to the manufacturer—or timely purchase-price use tax—and rent without further tax. Or, if they made no other use, they could hold seller's permits, give resale certificates and collect lessee use tax measured by rent.

The franchisor preliminarily planned tax by the county where each franchisee was located. Counsel instead analyzed historical district taxes above the 6% base: if transactions tax applied, the seller owed it and could collect reimbursement; district use-tax collection could be required or not depending on facts, but voluntary collection was allowed. When franchisees gave no resale certificate, the appropriate total rate was the district where property would be used.

No brochure, sign/rider, agreement, service, price/rent, location, permit/certificate, tax election/return or outcome appears. Tax Tips for Leasing and Tax Tips for Transit Taxes were enclosed but are absent. Live Annotation 330.4075 publishes the same-form and two-option result but omits the district analysis and pamphlets. Neither source separately decides the tax treatment of placement/removal services.

Common questions

Did changing rider panels make the signs materially different?

No, under the stated assumption that the swaps required very little effort.

Did Counsel verify that rider swaps added no value?

No. The requester asserted no value effect; Counsel's stated assumption concerned effort.

Could the franchisees pay tax once on purchase price?

Yes. They could pay reimbursement to the vendor or timely elect purchase-price use tax, then rent the same-form signs tax-paid.

Could they instead collect tax on rent?

Yes, if they made no other use of the signs, held the required permits, and properly bought them for resale.

Did the letter tax placement and removal separately?

No. It identifies those franchisee services but does not separately analyze their charges.

What location governed the district-rate discussion?

The opinion used the district where the property would be used, while noting that mandatory collection of district use tax can depend on transaction-specific facts.

Could the franchisor collect district use tax voluntarily?

Yes, even if the transaction's facts did not otherwise require collection.

Were the brochure and tax pamphlets available?

No. The brochure and two identified Tax Tips enclosures are absent.

Was an actual franchise transaction or tax return shown?

No. The source gives prospective advice without agreements, elections, returns or later outcomes.

Citations and references

• Revenue and Taxation Code sections 6006(g)(5), 6010(e)(5); regulation 1660(c)(1)–(2) — same-form and tax options
• Revenue and Taxation Code sections 6201–6204 — lessee use tax and lessor collection/payment
• Revenue and Taxation Code sections 6007 and 6051 — leasing-only resale treatment
• Revenue and Taxation Code sections 6006 and 6091; regulation 1668 — permits and resale certificates
• Annotations 330.3900 and 330.3920 et seq. — value/fabrication rules
• Revenue and Taxation Code section 7251 et seq. — district transactions/use taxes
• Tax Tips for Leasing and Tax Tips for Transit Taxes — enclosures absent
• Live Annotation 330.4075 — sign/rider conclusion and both tax paths dated May 20, 1988
• Request, brochure, transactions/work/value, agreements, locations/tax/returns and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.4075
• Original supporting opinion: 330.4075 PDF

Original ruling text

330.4075

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

May 20, 1988

B--- L. G---, President
S--- of S---, Inc.
XXX E. D-----, CA XXXXX
Re:

SR -- XX-XXXXXX

Dear Mr. G---:
This is in response to your letter dated March 31, 1988 regarding the application of sales tax to the sale of signs for lease. You set forth the following facts: “I would like to introduce you to our company, S--- of S---, Inc. S--- of S---, Inc. is in the process of becoming a franchisor in the State of California. Our primary business will be the manufacturing of complete real estate signs including frames, signs, and stakes. These completed packages will then be sold to our franchisee structure. The franchisee will in turn rent these completed signs to local real estate offices. The franchisees’ service will also include the placement and removal of the signs. “We, as the franchisor, intend to change our franchisees sales tax on each sign they purchase. As you will see by the enclosed brochure, all of the sign packages except models R-8 and R-9 carry no rider for attachments. In the case of models R-8 and R-9, which in fact carry riders, the franchisee will have a choice of twenty riders which are included in the sale price. There will be occasions when the riders may be changed by the franchisee but this will not effect the value of the sign. “All signs purchased from S--- of S--- will be leased by the franchisees to their customers in the same fashion as acquired from us. The signs may not be modified but may include an option to change riders. S--- of S---, Inc. the franchisor has made the preliminary decision to charge the appropriate tax for the County in which our franchise is located.”

Mr. B--- L. G---

-2-

May 20, 1988
330.4075

The lease of tangible personal property is a “sale” and “purchase” unless the property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or has timely paid use tax measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6010(e)(5), Reg. 1660(c)(2).) A lease that is a sale and purchase within this definition is subject to use tax on the lessee, which the lessor must collect and pay to the state. (Rev. & Tax. Code §§ 6201, 6202, 6203, 6204, Reg. 1660.) Thus, when a lessor leases property in substantially the same form as required, the lessor may elect to pay sales tax reimbursement to the lessor’s vendor or elect to pay use tax measured by purchase price timely with the return of the lessor for the period during which the property is first placed in rental service, and no further tax would be due on the lease. (Reg. 1660(c)(2).) If the lessor does not make one of these two elections, or if the property is not leased in substantially the same form as acquired by the lessor, use tax applies to the lease measured by the rentals payable. (Reg. 1660(c)(1).) The initial question under your facts is whether the signs you sell will be leased in substantially the same form as acquired. If not, and if your purchasers, the lessors, will make no use of the signs except to lease them, then your sale of signs is a sale for resale and would not be subject to tax. (Rev. & Tax. Code §§ 6007, 6051.) If this were the case, your purchasers would be required to hold seller’s permits and you would be advised to take resale certificates from them. (Rev. & Tax. Code §§ 6006, 6091, Reg. 1668.) The general rule for determining whether property is leased in substantially the same form as acquired is that if the value of the property as leased is substantially in excess of the value of the property as acquired, the property is not leased in substantially the same form as acquired. (Business Taxes Law Guide Annotation 330.3900 (2/17/67).) In essence, if the property is leased in a form that requires little or no fabrication by the lessor we regard the property to be leased in substantially the same form as acquired. (See Business Taxes Law Guide Annotation 330.3920 et seq.) As we understand your facts, the lessor will lease the signs in the same form as acquired except that the lessor may have several riders for certain signs and would change the riders depending on the lessee’s desires. We assume that these changes require very little effort. Based on this assumption, we conclude that the signs are leased in substantially the same form as acquired and that your purchasers, the lessors, may elect to pay you sales tax reimbursement or to pay use tax measured by purchase price. If they do so, their leases of the signs would not be sales and purchases under the Sales and Use Tax Law and would not be subject to sales or use tax. You indicate that have decided to charge the appropriate tax for the county in which the purchaser is located. In counties in which the total sales or use tax rate is over 6 percent, special districts have imposed a transactions (sales) and use tax (see Rev. & Tax. Code § 7251 et seq.) and I assume you mean this district tax imposed over 6 percent when you refer to the appropriate tax for the county in which your franchisee is located. If the district transactions tax applies to a particular transaction, you would owe that tax and could collect reimbursement from your

Mr. B--- L. G---

-3-

May 20, 1988
330.4075

customer. If the district use tax applies to a particular transaction, you may or may not be required to collect it from your customer and pay it to the state depending on the facts involved in that transaction. However, even if you are not otherwise required to collect the tax, you may do so. Since you wish to charge the appropriate tax for the district in which property will be used, it is not necessary to analyze whether you would otherwise be required to do so. In summary, we conclude that your purchasers will lease the signs purchased from you in substantially the same form as acquired. They may therefore elect to pay you sales tax reimbursement or timely pay use tax measured by purchase price and lease the signs with no further sales or use tax being due. If they make no use of the signs other than leasing, they may also issue you resale certificates and collect use tax from their lessees measured by rentals payable. If they do not issue you resale certificates when purchasing the signs, the appropriate total sales and use tax rate would be the rate of the district in which the property will be used. You may collect the tax imposed by the district in which the property will be used even if you are not otherwise required to do so. Enclosed for your information are pamphlets titled Tax Tips for Leasing of Tangible Personal Property in California and Tax Tips for Transit Taxes. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel
DHL:ss
Enclosures
bc:

--- – District Administrator